FP Answers: Should I take CPP when I retire at 60 or wait until I’m 65 or older?

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By Julie Cazzin and Allan Norman

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Q : I am 58 years old, a renter and would like to retire at age 60. I have a solid registered retirement savings plan (RRSP) invested in exchange-traded funds (ETFs) worth $300,000 (invested 70/30 in an equities/fixed-income mix), as well as investments in a non-registered account totalling $300,000 invested in the same way. I will need $50,000 net annually in retirement and am paying $1,800 a month for a two-bedroom apartment in a suburb of Toronto. Does it make sense to take my Canada Pension Plan (CPP) benefits at age 60 and defer withdrawals from my RRSP until a later date? Or, should I start making withdrawals from my RRSPs in two years and wait until I am 65 or older to draw my CPP? — Sabina F.  

FP ANSWERS : Sabina, you have a few things to consider before making your retirement and CPP decisions. First, do you want to maintain and enhance your lifestyle throughout your retirement? And, second, what financial planning strategies, including when to draw CPP, will help you to do just that? As you approach your decision, there are several things to consider.

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For example, will $50,000 a year indexed at two per cent be the right amount to maintain your lifestyle throughout your lifetime? The best way to figure this out is to write down your current expenses and think about which ones might change over time.

Now, how much money is enough to give you an after-tax retirement income of $50,000 annually after accounting for CPP and Old Age Security (OAS)? Will $600,000 be enough? Would knowing your number motivate you to do what’s needed to do to secure your lifestyle?

After modelling your situation, using a 4.8-per-cent return on investments, I see you running out of money at age 80, at which time you will be reliant on CPP and OAS for income. Are you OK with that or would you like your investments to last to age 90 and beyond?

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To close that gap, you can work longer, save more, take in a tenant or reduce your spending. Perhaps you have some other ideas as well. Once you’ve done some soul searching about your retirement lifestyle, then you would apply financial planning strategies — not before.

Lifestyle decisions have the greatest impact on a financial plan, which is why, as much as possible, they need to be considered first.

Financial planning will help you with decisions around tax planning, which accounts to draw from and the timing for when to start CPP. Ultimately, it will give you the confidence you need so that you can live the retirement you want without worries.

The first planning step is to give some thought to how you can draw your income in a way that keeps your taxes low and maximizes tax deductions, credits and other government benefits.

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Start by transferring money from your non-registered account to a tax-free savings account (TFSA) while doing your best to minimize capital gains tax. If your bonds are held separately, it is likely the capital gain is low, and you could move them without much tax.

Check to see if there is a way to collect the guaranteed income supplement (GIS), which would be worth about $8,500 annually in today’s dollars, between the ages of 65 and 71. To do this, you will need to minimize your taxable income. This means drawing an income from your TFSA, which isn’t taxed, as well as from your non-registered account, which is partially taxed. Don’t take any money out of your RRSP and delay CPP to age 70.

It is quite possible that the taxable distributions, dividends and capital gains on your non-registered account will prevent you from collecting the GIS. This is why you want to start transferring some of that money into your TFSA now.

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If the GIS plan is going to work, then you would draw from your RRSP in the first few years of your retirement (age 60 to 64) to conserve money in your TFSA and non-registered account so that they can be used from age 65 to 72.

If the GIS plan isn’t going to work, consider drawing $10,000 to $15,000 from your RRSP at age 65 to match the federal basic personal amount, the amount you can earn before paying tax. I’d recommend about $10,000 to $15,000, because you will have some taxable amounts to pay on the non-registered accounts, plus some provincial tax.

In both cases, you can avoid the 30-per-cent withholding tax on RRSP withdrawals by converting some or all of your RRSP to a registered retirement income fund (RRIF) at age 59, the year prior to making your first withdrawal.

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You do not have to pay withholding tax on the minimum RRIF withdrawal in the second year of a RRIF and you don’t have to make a withdrawal in the first year of a RRIF.

You can also convert your RRIF back to an RRSP if you take on a part-time job and don’t need the RRIF income, or if you pursue the GIS strategy and want to lower your taxable income. Do the conversion back to the RRSP in the year you turn 63 and don’t make an RRSP withdrawal at age 64 to make sure you get the GIS at age 65.

As for when you should start your CPP, a  study by the Society of Actuaries suggests that, mathematically, most people need to only think about two things: the future rate of return on your investments and how long you are going to live.

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The longer you are going to live, the more sense it makes to delay your CPP. The higher your expected investment return, the sooner you should start CPP. The problem with this criteria is you don’t know.

Delaying CPP makes sense in cases where you are able to collect the GIS and still maintain your lifestyle. The main reason for delaying CPP is to create a higher guaranteed, indexed income later in life. If you have more than enough money, this is not as important; if you have just enough and can afford to delay CPP to 70, then it makes sense. In almost all cases, it makes sense to delay until at least age 65.

Sabina, the main thing is to give some thought to your retirement lifestyle and whether you have enough. If not, what changes can you make? These are the things that are in your control and will have the biggest impact on your future. The planning piece is to help you make good decisions, deal with change and give you the confidence to live a fun, worry-free retirement.

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If you’re interested in reviewing this, or learning more, you can click on this video I put together .

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Allan Norman, M.Sc., CFP, CIM, RWM, is a fee-only lifestyle financial planner with Atlantis Financial Inc. and a fully licensed investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is intended for Canadian residents only.

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